A Charity’s Guide to Joint ATO & ACNC Actions on Tax Concessions

Introduction

Maintaining eligibility for charity tax concessions is a critical requirement for Australian not-for-profit organisations. This status depends on compliance with two key regulators, the Australian Taxation Office (ATO) and the Australian Charities and Not-for-profits Commission (ACNC), which work in close collaboration to oversee the sector. Because ACNC registration is a prerequisite for a charity to be endorsed by the ATO for Commonwealth tax concessions, both agencies have a shared interest in ensuring ongoing regulatory compliance.

When a charity is facing a review or investigation from the ACNC or ATO, understanding the process and the available protections becomes essential. This guide serves as a practical resource for Australian charities that have been targeted by an audit, offering clear information on how to manage the investigation process and defend the organisation’s access to vital tax concessions and endorsement.

Interactive Tool: Check Your Charity’s Risk of Losing Tax Concessions & Status

The New Enforcement Alliance ATO & ACNC Collaboration

Understanding the Role of Each Regulator

The ACNC serves as the national regulator responsible for registering organisations as charities. This registration is the crucial first step for an organisation seeking to access certain Commonwealth benefits.

Following ACNC registration, the ATO takes on the role of administering and endorsing these charities for Commonwealth tax concessions.

Essentially, the process involves two key stages:

• First, the ACNC assesses an organisation’s purposes and activities to determine if it meets the legal definition of a charity.
• Once an organisation is successfully registered with the ACNC, its details are passed on to the ATO, which then assesses the charity’s eligibility for specific tax concessions, such as income tax exemption and Deductible Gift Recipient (DGR) status.

Why the ATO & ACNC Work Increasingly Closely

The collaboration between the ATO and the ACNC is essential because registration with the ACNC is a prerequisite for a charity to access Commonwealth tax concessions.

This shared jurisdiction necessitates a coordinated working relationship due to the following historical and ongoing factors:

• Before the ACNC was established, the ATO was the de facto regulator for charities.
• The ATO continues to hold significant responsibilities related to tax law.

To streamline the process for new charities, the ACNC’s registration application allows organisations to simultaneously apply for endorsement for charity tax concessions.

This seamless flow of information reduces the regulatory burden on charities through a highly coordinated approach:

• After the ACNC approves the charity registration, it forwards the application for tax concessions directly to the ATO.
• This ensures that both agencies work together effectively to regulate the sector from registration through to tax endorsement.

Key Triggers for a Joint ATO & ACNC Investigation

Scrutiny on Related-Party Transactions & Private Benefit

One of the most significant triggers for an investigation is the misuse of a charity’s funds or assets for private benefit. In fact, the ACNC identifies fraud and financial mismanagement, including private benefit, as a key compliance priority.

Consequently, concerns related to private benefits are the most frequent type of issue reported to the ACNC. Transactions that provide a material benefit to specific individuals can breach the ACNC Governance Standards, particularly when they involve:

• Providing benefits to a charity’s board members.
• Transactions involving internal staff.
• Arrangements that benefit their relatives.

These standards strictly require a charity to be not-for-profit and work towards its charitable purpose. Therefore, any arrangement suggesting an organisation is operating for the private gain of individuals rather than for the public benefit can attract intense scrutiny from both the ACNC and the ATO.

Ensuring Deductible Gift Recipient Compliance

Charities endorsed as a Deductible Gift Recipient (DGR) must continually satisfy the eligibility criteria, a complex area often requiring legal advice for maintaining their Deductible Gift Recipient status. Because endorsement is not a permanent status, it remains strictly conditional on ongoing compliance.

To maintain this status, the ATO recommends that organisations conduct a self-review of their DGR status at least annually to ensure they still meet all requirements. Failure to maintain these standards can lead to serious consequences, including:

• The ATO actively reviewing organisations and revoking the DGR status of those found to be non-compliant.
• Triggering a formal investigation if a charity no longer meets the specific rules for its endorsement category.
• The ultimate loss of the organisation’s ability to receive tax-deductible donations.

Maintaining Income Tax Exemption Status

Not-for-profit organisations are required to self-assess their eligibility for income tax exemption on an annual basis. This process involves reviewing the organisation’s purposes and activities to ensure they continue to meet the requirements for this significant tax concession.

For some not-for-profits, this compliance process includes lodging an annual self-review return with the ATO. This yearly obligation serves as a regular checkpoint that can quickly bring an organisation’s activities under the ATO’s spotlight.

Specifically, a more thorough review or investigation by the ATO can be prompted if:

• The self-assessment process reveals that the organisation may no longer be eligible for the income tax exemption.
• There are notable inconsistencies in its reporting.

The ATO & ACNC Investigation Process

What the ATO Spotlight Means for NFP’s Tax-Exempt Status

When a charity is under review, regulators assess whether the organisation still meets all eligibility requirements for registration and tax concessions. This scrutiny plays a crucial role in maintaining compliance across the not-for-profit sector.

If an investigation finds a charity is non-compliant, it can trigger serious consequences, including:

• Revocation of registration – the most severe sanction, applying to every registered charity.
• Loss of Commonwealth tax concessions, removing access to valuable exemptions.
• Cancellation of DGR status, which the ATO has recently revoked for ineligible organisations.

How the ATO & ACNC Share Information During an Investigation

The collaboration between the ACNC and the ATO begins when a charity first applies for registration. Once the ACNC approves an organisation’s charity status, it forwards the details to the ATO so the latter can assess tax concessions and endorsements.

This initial information transfer lays the groundwork for ongoing regulatory oversight.

During an investigation, information sharing is governed by the Australian Charities and Not-for-profits Commission Act 2012 (Cth). An ACNC officer may disclose protected information to another Australian government agency, such as the ATO, provided four conditions are met:

• The recipient is an Australian government agency: the disclosure must go to a recognised body like the ATO.
• The information assists the agency: the ACNC officer must believe the data will help the receiving agency perform its functions or exercise its powers.
• The disclosure has a clear purpose: information must be shared solely to aid the other agency in its duties.
• The disclosure promotes ACNC Act objects: sharing must be reasonably necessary to advance one of the Australian Charities and Not-for-profits Commission Act 2012 (Cth)’s three objects, including maintaining public trust in the not-for-profit sector.

A Defence Guide for Australian Charity

Responding to an Audit & Managing Evidence

When your charity receives notification of an audit, it is important to seek professional legal advice early in the process. The ATO allows time for you to consult with your lawyers when responding to its notice or access powers.

Maintaining organised and thorough records is also crucial. For instance, organisations with DGR status are required to keep records that explain all transactions relevant to their endorsement.

Specifically, these records must clearly show:

• All gifts of money or property made to the organisation.
• Any money received as a result of those gifts.

Protecting Communications with Legal Professional Privilege

Legal Professional Privilege (LPP) is a common law right that protects confidential communications between a charity and its lawyer. This protection applies when the communication’s dominant purpose is for the lawyer to provide legal advice or for use in actual or reasonably anticipated litigation.

It is important to note that the privilege belongs to the client (the charity), rather than the lawyer. To claim LPP in response to a formal notice from the ATO, it is recommended that you follow the approach set out in the ATO’s LPP Protocol.

Utilising this protocol is beneficial because it helps you to:

• Accurately identify privileged communications.
• Properly document these communications to support your claim.

Understanding the Accountants’ Concession

The accountants’ concession is an administrative policy granted by the ATO, not a legal privilege. Under this concession, the ATO agrees not to seek access to certain advice documents prepared by external professional accounting advisers, such as restricted source and non-source documents.

However, this protection is not absolute. The ATO may seek access to these documents in exceptional circumstances, which can include situations where:

• The law requires the ATO to determine the purpose of a transaction, such as under Part IVA of the Income Tax Assessment Act 1936 (Cth).
• There is a reasonable suspicion of tax evasion, fraud, or other illegal activity.
• The documents provided do not allow the ATO to determine the tax consequences of a transaction.
• There is a risk that source documents may be lost or destroyed.

Pathways for Disputing Unfavourable Findings

If your charity disagrees with a decision made by a regulator, there are formal pathways available to dispute the findings. The first step is typically to lodge a written objection with the regulator that made the decision, requesting an internal review.

Should the outcome of the internal review remain unsatisfactory, your organisation has further options to escalate the matter, which may require assistance from administrative lawyers. Depending on the circumstances, you can:

• Apply to the Administrative Appeals Tribunal for an independent review of the decision.
• Appeal the decision directly to the Federal Court of Australia in certain cases.

The Consequences of Adverse Findings

Revocation of DGR or Charity Status by Commonwealth Regulators

The ACNC has the authority to revoke a charity’s registration for serious or persistent non-compliance. This is the most severe sanction available and removes an organisation’s entitlement to access Commonwealth charity tax concessions.

If the ATO revokes a charity’s DGR status, the consequences are immediate and significant. The not-for-profit organisation will:

• No longer be entitled to receive tax-deductible gifts or donations.
• Be required to remove all references to its tax-deductible status from its website and other materials.
• Need to transfer any surplus gifts and donations to another eligible DGR.

The Automatic Loss of NSW Fundraising Authority

Under the Charitable Fundraising Act 1991 (NSW), an organisation must hold a valid authority to conduct fundraising appeals, a process guided by strict rules governing charity fundraising and donations in New South Wales. The loss of ACNC registration has a direct impact on this authority.

If an organisation’s ACNC registration is revoked, it triggers several strict compliance measures and operational impacts, which include:

• A requirement to notify NSW Fair Trading within 28 days.
• Acting as a trigger for losing its authority to fundraise in the state.
• Directly affecting its ability to solicit and receive support from the public in NSW.

Conclusion

Understanding the joint regulatory oversight of the ATO and ACNC is crucial for charities, as non-compliance can trigger investigations and lead to severe consequences like the loss of tax concessions and fundraising authority. When faced with an audit, organisations can employ several defensive strategies, including careful evidence management, claiming legal professional privilege, and formally disputing unfavourable decisions.

Given the significant risks to your charity’s registration and tax concession status, it is essential to act decisively when facing regulatory scrutiny. For specialised guidance tailored to the sector, contact LawBridge’s specialist not-for-profit lawyers today to ensure your organisation is effectively protected and compliant.

Frequently Asked Questions